Top-level design for supremacy: Economic policy making in China under President Xi

He, Alex Working Paper Top-level design for supremacy: Economic policy making in China under President Xi CIGI Papers, No. 242 Provided in Cooperation with: Centre for International Governance Innovation (CIGI), Waterloo, Ontario Suggested Citation: He, Alex (2020) : Top-level design for supremacy: Economic policy making in China under President Xi, CIGI Papers, No. 242, Centre for International Governance Innovation (CIGI), Waterloo (Ontario) This Version is available at: https://hdl.handle.net/10419/299714 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0/ CIGI Papers No. 242 — May 2020 Top-level Design for Supremacy: Economic Policy Making in China under President Xi Alex He CIGI Papers No. 242 — May 2020 Top-level Design for Supremacy: Economic Policy Making in China under President Xi Alex He Credits Director, Digital Economy Research Robert Fay Program Manager Heather McNorgan Senior Publications Editor Jennifer Goyder Publications Editor Susan Bubak Graphic Designer Sami Chouhdary Copyright © 2020 by the Centre for International Governance Innovation The opinions expressed in this publication are those of the author and do not necessarily reflect the views of the Centre for International Governance Innovation or its Board of Directors. For publications enquiries, please contact [email protected]. This work is licensed under a Creative Commons Attribution — Non-commercial — No Derivatives License. To view this license, visit (www.creativecommons.org/licenses/by-nc-nd/3.0/). For re-use or distribution, please include this copyright notice. Printed in Canada on Forest Stewardship Council® certified paper containing 100% post-consumer fibre. Centre for International Governance Innovation and CIGI are registered trademarks. 67 Erb Street West Waterloo, ON, Canada N2L 6C2 www.cigionline.org About CIGI The Centre for International Governance Innovation (CIGI) is an independent, non-partisan think tank whose peer-reviewed research and trusted analysis influence policy makers to innovate. Our global network of multidisciplinary researchers and strategic partnerships provide policy solutions for the digital era with one goal: to improve people’s lives everywhere. Headquartered in Waterloo, Canada, CIGI has received support from the Government of Canada, the Government of Ontario and founder Jim Balsillie. À propos du CIGI Le Centre pour l’innovation dans la gouvernance internationale (CIGI) est un groupe de réflexion indépendant et non partisan dont les recherches évaluées par des pairs et les analyses fiables incitent les décideurs à innover. Grâce à son réseau mondial de chercheurs pluridisciplinaires et de partenariats stratégiques, le CIGI offre des solutions politiques adaptées à l’ère numérique dans le seul but d’améliorer la vie des gens du monde entier. Le CIGI, dont le siège se trouve à Waterloo, au Canada, bénéficie du soutien du gouvernement du Canada, du gouvernement de l’Ontario et de son fondateur, Jim Balsillie. Table of Contents vi About the Author vi Acronyms and Abbreviations 1 Executive Summary 2 Introduction 3 Top-level Design for Full Control: Economic Policy Making under Xi 6 Institutional Changes for Top-level Design: The Strengthened Roles of Central Leading Groups 9 Building the Party’s Solid Leadership over Everything Is the Key for Top-level Design 13 Top-level Design: Top Principle Is Stability, Main Goal Is Sustainable Economic Growth 16 The Problems with Xi’s Top-level Design in Economic Policy Making 19 Case Study of Economic Policy Making under Xi: Supply-side Structural Reform 24 Conclusion: Impacts of Xi’s Top-level Design on China’s Economic Policy Making 28 Works Cited vi CIGI Papers No. 242 — May 2020 • Alex He About the Author Xingqiang (Alex) He is a CIGI research fellow. His work focuses on China and global economic governance, the Group of Twenty, domestic politics in China and their role in China’s foreign economic policy making and Canada-China economic relations. Prior to joining CIGI in 2014, Alex was a senior fellow and associate professor at the Institute of American Studies at the Chinese Academy of Social Sciences (CASS) and a visiting scholar at the Paul H. Nitze School of Advanced International Studies, Johns Hopkins University in Washington, DC (2009-2010). Alex was also a guest research fellow at the Research Center for Development Strategies of Macau (2008-2009) and a visiting Ph.D. student at the Centre of American Studies at the University of Hong Kong (2004). Alex is the author of The Dragon’s Footprints: China in the Global Economic Governance System under the G20 Framework (2016) (in both English and Chinese) and co-author of A History of China-U.S. Relations (2009). He has published dozens of academic papers, book chapters and newspaper and magazine articles. He has a Ph.D. in international politics from the Graduate School of CASS and previously taught at Yuxi Normal University in Yunnan Province, China. Alex is fluent in Chinese and English. Acronyms and Abbreviations BRI Belt and Road Initiative CAC Central Auditing Commission CCAC Central Cyberspace Affairs Commission CCDI Central Commission for Discipline Inspection CCOLG Central Commission for Overall Law-based Governance CEWC Central Economic Work Conference CLGCDR Central Leading Group for Comprehensively Deepening Reform CLGFEA Central Leading Group for Financial and Economic Affairs CNSC Central National Supervisory Commission COPR Central Office of Policy Research CPC Communist Party of China MOHURD Ministry of Housing and Urban-Rural Development NDRC National Development and Reform Commission PBoC People’s Bank of China PBSC Politburo Standing Committee RMB renminbi SARS severe acute respiratory syndrome SOEs state-owned enterprises 1Top-level Design for Supremacy: Economic Policy Making in China under President Xi Executive Summary Presenting China’s reform as a holistic system consisting of economic, political, cultural, social and ecological subsystems, President Xi Jinping introduced a top-level design as the theoretical foundation for his overall control of the reform agenda and economic policy-making process. Xi greatly strengthened the roles of central leading groups in the reform and policy-making process; these strengthened central leading groups constitute the backbone of the institutional framework for his idea of top-level design. In a move that was different from his predecessors, Xi put an unprecedented emphasis on the Communist Party of China’s (CPC's) control of economic policy, which is expected to be guaranteed through the greatly reinforced party control over the state bureaucracy and the private sector. Sticking to the party’s tendency to be extremely risk averse, Xi’s top-level design embraces stability as the top principle while seeking the primary goal of sustainable economic growth. Supply-side structural reform constitutes Xi’s first major economic and reform proposal to confront the most difficult and most important issue in China’s economy, i.e., economic restructuring, and to deliver sustainable economic growth. In the four years after it was introduced at the end of 2015, supply-side structural reform achieved limited success and had negative impacts on China’s economy. A heavy reliance on administrative orders, achievements in cutting low-end and ineffective supplies and improvements in the industrial structure in steel, coal and other sectors with serious overcapacity had negative consequences for the private sector; most of the state-owned enterprises (SOEs) in those sectors with overcapacity increased their profit and benefited significantly from the reform. The policy of inventory reduction in the real estate sector unexpectedly led to soaring real estate prices in 2016 and greatly intensified the existing asset bubble. The financial deleveraging policy was introduced with unprecedented strict supervision policies and led to a sharp liquidity shrinking and rise in interest rates in financial markets and to the default of many firms. Facing this mixed picture, supply-side structural reform began to shift its focus from 2017 and expanded from its original mandate of cutting overcapacity, deleveraging and reducing costs for enterprises into an industrial upgrade moving up the global value chain and featuring innovation and cuttingedge technologies in advanced manufacturing. Xi’s style of leadership, featuring Xi-dominated party central’s tightened control over policy making in every sector and field in China, had profound impacts on China’s economic policymaking process. His unprecedented power and authority and the new approach of top-level design emboldened him to push forward the long overdue and difficult structural reform of China’s economy. Policy making under Xi has followed a top-down approach; the trial-and error approach based on the bottom-up, incremental method has been followed less. Resorting to institutional power and unprecedented emphasis on party discipline and party loyalty, Xi put great efforts on the party’s tight control of both policy making and policy implementation. The party’s deeper involvement in economic policy making and economic management intensified China’s model of government intervention in the economy and further complicated the relations between the state-owned sector and the private sector in the economy. Xi’s style of highly concentrated power and full control over policy making has achieved a mixed result. It may have pushed through some difficult economic reforms, but it created a variety of new problems and exacerbated the existing bureaucratic problems in China’s political economy. These problems can have catastrophic consequences when facing an emergency situation, such as a public health crisis, as the novel coronavirus epidemic beginning in January 2020 demonstrated. The stability-obsessed ruling style under President Xi’s top-level design and the unprecedented pressure it brought on state and local bureaucrats are, unexpectedly, unable to react swiftly when facing a crisis. Xi’s style of an upgraded version of one-man control over major policy making on economic affairs and in other fields has the potential to last until his complete retirement, unless the ongoing economic downturn China is facing lasts and develops into a serious economic crisis. 2CIGI Papers No. 242 — May 2020 • Alex He Introduction Each paramount leader since the founding of the People’s Republic of China in 1949 has left his footprints on the legacy of the CPC’s ruling in China. Chairman Mao and Deng Xiaoping are regarded as the leaders who enjoyed the highest authority and absolute power, respectively, over the party and the country in their eras. The subsequent leaders, Jiang Zemin and Hu Jintao, who did not belong to the generation of revolutionary leaders, are deemed more mediocre top leaders who lacked the charisma of Chairman Mao and Deng Xiaoping, and who tried hard to seize improved control of the party and the country during their terms but failed. Jiang Zemin’s power likely reached its heyday at the end of his incumbency, but the governance on economic affairs was not in his control throughout most of his reign. Hu Jintao has been widely regarded as the weakest top leader since 1949 and he had to share power with the other eight members of the Politburo Standing Committee (PBSC) and could only grasp one-ninth of the power in his 10-year rule. Xi Jinping, as a princeling who has the so-called red noble blood, seemingly holds the true ideals and convictions of the traditional values of the CPC, such as “serving the people” and “striving for the great rejuvenation of Chinese nation,” claimed to be dedicated to reviving the glory of Communist China.1 He began to consolidate his power with a surprisingly persistent, stern, even harsh anticorruption campaign immediately after becoming China’s president in 2013. After all, securing and fortifying the highest authority stands as the precondition for a top leader in China to proceed with his vision and reform goals during his reign. Since democratic political reform disappeared from the agenda of the Chinese government after the 1989 Tiananmen event, the most important task for a paramount leader in China is to maintain sustainable economic growth and, subsequently, social and regime stability, which will conversely help the top leader reinforce his control over the party and the country. There has been consensus on achieving sustainable economic growth among China’s elite and leaders for years. The goal relies 1 Xiseemstoreiterateandimplementrevivingtheparty’sexcellenttradition and working style to better serve the people more than any other previous top leader (Xinhua 2017a; Xi 2017). on further comprehensive and deepening reform to achieve the transition to an upgraded growth model that focuses on innovation and consumption instead of relying mainly on investment and export. The toughest part of this reform, however, has been the lack of uncompromising determination and capability for the top leaders to persist with the ongoing reform when facing economic downturn and the signs of political and social instability that typically followed the economic decline. It was the case in the Hu-Wen era prior to Xi. Furthermore, the lack of urgency and the 2008 global financial crisis helped to deter top leaders Hu Jintao and Wen Jiabao from pushing hard for the necessary economic transition. China’s economic policy-making process has shown some new features since 2013 — it seemed that President Xi was determined and equipped with a capacity to pursue the most difficult economic transition since the reform began at the end of the 1970s. Top-level design has emerged and developed into President Xi’s signature approach to seeking full control over economic policy making. The idea of top-level design and the holistic way of thinking behind it had been raised by Xi and one of his close advisors even before Xi came to power in China. This is the third and final paper in a three-part series exploring the decision-making process in China. Based on the previous two papers, which respectively reviewed the relevant literature, the theoretical framework and methodologies employed and scrutinized China’s political structure and decision-making process, the paper examines the economic policy-making process featuring the top-level design for comprehensive control in China under President Xi. Supply-side structural reform is the significant economic policy initiative introduced since Xi assumed the presidency of China in March 2013. The paper further discusses the structural reform as a case study to demonstrate the new model of economic policy making. The paper concludes with a discussion of the impacts of President Xi’s style of leadership on China’s economic policy-making process. 9Top-level Design for Supremacy: Economic Policy Making in China under President Xi eroded by the nine leading groups Xi heads. These leading groups are emerging and undermining the Politburo as the highest policy-making authority. The significant institutional changes taken by Xi to establish new central leading groups and substantive control over key leading groups in the policy-making process is supposed to solve problems in the policy-making stage but not the ones in policy implementation. The central leading groups are basically key policy-making groups that exist at the central level, although some of them exist at local levels (for example, there are CLGFEA at the provincial level). Generally, they are groups for policy making, coordination and supervision and do not have the capacity for policy implementation. For example, the CLGCDR at the central and the local level are playing the roles of policy making, coordination and supervision but not policy execution, which is carried out by local government agencies. Having full knowledge of the extreme importance of policy implementation, President Xi needed to make an extra effort to forge an effective mechanism to enforce policies. It is impossible to discard the entire bureaucratic system and rely on the party organization to fulfill the task. The State Council-headed national bureaucracy is still the fundamental force he must rely on for policy implementation. How to get better control of the state bureaucracy and improve policy enforcement is on Xi’s agenda after all the institutional changes he made to establish the model of leading groups ruling. This means solving the difficult but crucial issues that blocked the reforms from being implemented. To do so, Xi turned to stricter party discipline and the party’s overall control of the entire state bureaucracy and the whole of society. BuildingtheParty’s Solid Leadership over Everything Is the Key for Top-level Design The significant reshuffle of party and government institutions in March 2018 highlighted Xi’s efforts to reinforce the party’s leadership over the state bureaucracy and strengthen the party’s leadership in an all-inclusive way. The reshuffle was officially labelled the CPC’s efforts to further boost the restructuring of the party and the state’s institutions, but the core task of these reforms was aimed at establishing the party’s full institutional control of the state bureaucracy to make it operate more effectively and smoothly. As for the private sector, Xi had already began to strengthen the party’s control over it before the reshuffle. During the reshuffle, Chairman Mao’s 1970s slogan of “The Party exercises its leadership over all walks of life in every part of the country” was quoted in the newly revised Constitution of the CPC, a highly symbolic move that indicates the desire of the party to have central control over the state bureaucracy, the civil society and the private sector. Chinese party-state government is, by nature, omnipotent and penetrates the whole society, with its huge network of bureaucracy consisting of departments, bureaus, divisions and sections in both the party and the state system at both the central level and the local level, as well as tens of millions of officials who fill up the bureaucracy. Xi’s emphasis on the party’s leadership over everything focuses on the party’s tighter, closer and more direct control of the state bureaucratic system. Xi made it crystal clear in his explanatory notes for the reform of party and government institutions that giving the party’s overall leadership full play in all areas and aspects is the most important principle and the priority goal of the reform (Xi 2018). Given the traditional role of the State Council in handling the economic work, the decadelong priority in the CPC’s ruling in China, the party’s strengthened institutional control of the state bureaucracy indicates its intention to exercise a tightened control of economic work. The expected appointment of Liu He, Xi’s trusted senior advisor in economic and financial affairs in the party system, as the vice premier to take charge of the financial and industrial sectors in the state bureaucratic system, represented the most prominent gesture of the reshuffle. Specifically, President Xi built the party’s solid control over the state bureaucracy through upgrading leading groups to permanent commissions and establishing offices within the institutions of government for these commissions, sharing offices between the party’s organizations and the government agencies, as well as filling crucial positions in 10 CIGI Papers No. 242 — May 2020 • Alex He government agencies with his protégés. The party also scaled up its intervention into the private sector and civic society under President Xi. The restructuring and the upgrading of the party’s leading groups to commissions was regarded as the most important component of the reform, which helped reinforce the party’s control over the state bureaucracy regarding policy making in key areas, in particular economic-related fields. Xi also made this clear in the explanatory notes by saying the restructuring and upgrading of the party’s leading groups to commissions were “to strengthen the party central’s collective and unified leadership over important work and ensure a stronger leadership in which the party always control the overall situation and coordinate the efforts of all quarters” (ibid). Four important central leading groups in the significant areas of reform promotion, financial and economic affairs, national security, and cyber security were upgraded to permanent commissions. Two new commissions, the Central Commission for Overall Law-based Governance (CCOLG) and the Central Auditing Commission (CAC) were established (see Table 1). These central commissions cemented their control of the state bureaucracy by setting up their permanent offices at the ministries in the State Council for the first time. For example, the office for the CCOLG is set up at the Ministry of Justice and the office for the CAC is established at the Agency of Audit; the Central Cyberspace Affairs Commission’s (CCAC’s) office is set up at the Cyberspace Administration of China. Previously, the leading groups only had their offices and staff in the party system, never in the state bureaucratic system. The substantiation of these commissions and leading groups and the establishment of their Table 1: List of Nine Central Leading Groups (Commissions) President Xi Jinping Heads Original Name Name after Being Upgraded Original Acronym Acronym after Being Upgraded Responsibility Year Founded Central Leading Group for Comprehensively Deepening Reforms Central Comprehensively Deepening Reforms Commission CLGCDR CCDRC Nationwide reform promotion in all areas 2013, upgraded in 2018 Central Leading Group for Finance and Economic Affairs Central Financial and Economic Affairs Commission CLGFEA CFEAC Major finance and economic affairs 1958, upgraded in 2018 Central Leading Group for Foreign Affairs Central Foreign Affairs Commission CLGFA CCFA Foreign affairs 1958, upgraded in 2018 Central Leading Group for National Security Central National Security Commission CLGNS CNSC National security CLGNS: 2000 CNSC: 2013 Central Leading Group for Internet Security and Informatization Central Cyberspace Affairs Commission CLGISI CCAC Cyber security 2014, upgraded in 2018 Central Leading Group for Taiwan Affairs CLGTA Taiwan affairs 1954 Central Leading Group for Military Reform CLGMR Military reform 2014 Central Commission for Overall Lawbased Governance CCALG Promoting lawbased governance 2018 Central Auditing Commission CAC Auditing 2018 Source: Author. 11Top-level Design for Supremacy: Economic Policy Making in China under President Xi offices in the ministries in the state bureaucracy demonstrated that the party further corroded the de facto decision-making power enjoyed by the State Council. Xi’s direction that “the party’s leadership should be implemented and materialized at every links and aspects in the duties of the party and government’s agencies” (Xi 2018) is intended to institutionalize the position and the role the party plays as the highest level of leadership. Before the commissions’ offices were established in their counterpart ministries in the State Council, party committees and party groups that have long existed in all ministries at the State Council were the organizations the party relied on to materialize its control of the state bureaucracy. But that is not enough in the eyes of President Xi. With these new commissions, the party’s control of policy making in certain important aspects has been reinforced. In addition to the office setting of the leading groups and commissions in the State Council, another key reform measure taken by Xi to strengthen the party’s control over the government is “sharing offices by the similar agencies of the party and government or mergence of these agencies” (ibid.) to coordinate the restructuring of party and government institutions. The one that attracted the most attention is office sharing by the newly established Central National Supervisory Commission (CNSC) and the CPC’s Central Commission for Discipline Inspection (CCDI). Xi clarified in his explanatory notes for the reform that the purpose of sharing offices by the CNSC and the CCDI is to strengthen the party’s unified leadership over its anti-corruption campaign and to supervise all public officers that exercise public power. This plainly indicated that the party’s supervisory power has extended to all public officers, including non-CPC members in the state bureaucracy. Other significant sharing of offices and merging of agencies occurred in the fields of human resources, ideology, and religious and ethnic affairs. The CPC’s Organization Department will take care of all human resource issues and the Bureau of Public Officers in the State Council was incorporated into the Organization Department, but the name of the bureau was kept for the purpose of external exchanges. The Publicity Department of the CPC Central Committee has completely taken over press and publication supervision, including film, television and radio, which was previously overseen by the State Administration of Press, Publication, Radio, Film and Television. This indicated that the Publicity Department has greatly expanded its authority and taken over direct control of press, publication, television, radio and film. The Publicity Department has developed into the base camp for the CPC’s tight and direct grasp of the ideology and propaganda work. The United Front Work Department of the CPC Central Committee has also expanded its jurisdiction by incorporating three state agencies previously supervised by the State Council — religious affairs, overseas Chinese affairs and ethnic affairs. Xi also mentioned office-sharing arrangements at the provincial and lower levels at the 19th CPC National Congress. Although sharing offices or merging similar agencies of the party and government is not something new, all of these unprecedented significant arrangements in the reshuffling of party and government institutions in 2018 displayed Xi’s determination to underpin and facilitate the party’s control over significant issues in anti-corruption, human resources, ideology and religious and ethnic affairs. At this point, it is fair to say that the relations between the party and the government under President Xi were being restructured in a way that contrasted with his predecessors. Zhao Ziyang’s advocacy of the separation of the party and the government in the 1980s stalled following the 1989 Tiananmen event, and the reform toward separation of the party and the government remained on paper only during the eras of Jiang and Hu. The reform has been entirely denied under Xi’s reign (Wang 2017; Zhang 2017). In the name of comprehensively strengthening the party’s role, the reforms in Xi’s era have focused on the division of labour between the party and the government instead of separation of the party and the government. This means that authority over decision making has been further transferred to the party’s central commissions and leading groups, and the State Council acts more like executive agencies. The role of the premier of the State Council in policy making has been further enfeebled, and the party central exerts control over the ministries more easily and quickly to enforce policy. Politically, the significant reshuffling of party and government institutions in 2018 indicated that the government has further become a mere appendage of the party. The very weak separation of party and state that previously existed in some fields and sectors is gone, and a full integration of the party 12 CIGI Papers No. 242 — May 2020 • Alex He and the state has materialized. Observers have used terms such as “unified party and state,” or “the party is the state” to describe the relationship between the two under President Xi (Deng 2019). Behind the unification or integration of the party and the state, an obvious fact is that the party is above the state and has grasped total control of the state bureaucratic system. From the perspective of policy making and implementation, the significant reshuffle of party and government institutions in 2018 indicated that the party’s leading role over the government was institutionalized and could be more easily materialized, and the roles played by the party and the government were further fused to ensure the smoothness of decision making and policy implementation. The restructuring of the NDRC is a typical case that demonstrates the transition of policy-making power from the state bureaucracy to the party’s institutions. Since the inception of the CLGCDR in 2013, the NDRC has been concerned that its status as the leading agency in macroeconomic planning could be affected. Defined as a super committee that stands apart from vested interests in the government, the CLGCDR was designed to comprehensively push forward reforms and break the obstructions from all types of interest groups. With its extensive authority over investment and project approvals, as well as pricing power over key resources and services, the NDRC was targeted as the top agency in need of reform, given its role in creating vested interests and breeding corruption. The reform to the NDRC itself must be done by a detached body, which partly explains why the CLGCDR was set up for party central’s design for the comprehensive reform and the NDRC was downgraded to the executive agency for the reform (Xie 2013; 21st Century Business Herald 2014). Personnel adjustments in crucial positions in the party and government institutions were believed to have contributed to the party’s tighter control over the state and created smoother links between policy making and policy implementation. Xi took a two-pronged approach in this regard. On the one hand, since coming to power in 2013 he has quietly promoted his protégés to key positions in the party and government as the main way to fulfill his vision and plans. For instance, Xi’s former subordinate and long-time ally He Lifeng was appointed as the head of the NDRC in 2017, the crucial ministry in specific policy making and enforcement in economic affairs, which will help Xi’s efforts to consolidate its control over the regulatory bodies in China’s economic management.9 On the other hand, a consistent campaign to comprehensively strengthen party selfdiscipline, or emphasize the “purity” of the party, has been employed to ensure policy enforcement. Liu He’s promotion to vice premier indicated that he had become a significant supervisor on policy implementation with substantive authority over the state bureaucracy, in addition to his existing role as Xi’s top economic advisor and the senior policy maker in China’s economic and financial policy. Liu’s dual senior positions in both the party and state bureaucracy and in both policy making circles and policy implementation would help further smooth the interlinkages between policy making and policy execution. Seen from this perspective, Liu He has emerged as the new economic czar, as Premier Zhu did in the late 1990s. The private sector had already developed into a vital component of China’s economy following the reform and opening up that began at the end of the 1970s, accounting for 50 percent of tax revenue, 60 percent of GDP, 70 percent of technological innovation, 80 percent of urban employment and 90 percent of the total number of enterprises in China by 2018 (Xinhua 2019). The party under Xi’s rule has tried to exert direct influence over both domestic private enterprises and foreign companies but maintained the policy of encouraging the development of the private sector and further opening up to foreign capitals and investment in China in recent years. Before Xi, the party clearly required that the party organizations “cover” all the private enterprises in May 2012 (People’s Daily 2012). Xi strengthened the party’s control over non-government organizations in the field of business, culture and social groups by renewing the party’s work regulations on the “party group” in 2015 (Xinhua 2015b). President Xi pushed more aggressively for the party’s total “cover” over all the private business groups and nongovernment social groups. The establishment of party committees in some newly emerged domestic private companies, such as Xiaomi, Meituan and Kuaishou, and foreign companies, such as Samsung, in recent years sent strong messages in this regard. The percentage of private enterprises that have established party organizations in all private 9 Alargenumberofseniorofficialselevatedtokeypartyandgovernmental positionswereXi’sformersubordinates,classmatesorcolleagues.They aresupposedtobeloyaltohimandaretrustedtofulfillhispolicies. 13Top-level Design for Supremacy: Economic Policy Making in China under President Xi enterprises soared over a period of a few years, up from 54.3 percent in 2012 to 73.1 percent by 2017. The number of private enterprises that have established party organizations increased from 1.627 million in 2013 to 1.877 million in 2017 (Xinhua 2014c, 2018). The way the party organizations (party branches and party groups) operate in the private sector demonstrated the party’s total control of the whole society but not a direct interference with private enterprises’ business operation. It appears that the party wanted to stay informed about the status quo and trend of development in the private enterprises but did not try to take them over and push them out of the economy. Other moves undertaken by the party in recent years, however, demonstrated that the party is gradually intruding in the private sector. The CPC is advocating for the party committees to play a greater role in the management of private enterprises, even foreign companies or joint ventures. It also pushes for democratic management of private enterprises, meaning owners and employees jointly running the business, as shown by Qiu Xiaoping, vice minister of human resources and social security in 2018 (Ministry of Human Resources and Social Security of China 2018). The worst-case scenario could be the private sector being pushed out of China’s economy or being nationalized after “accomplishing its historic mission of achieving growth and should leave the market gradually,” as a widely circulated blog post (Wu 2018) claimed in September 2018. Under these circumstances, President Xi came out and mollified private entrepreneurs by announcing high-profile government support for the private sector following extensive concerns and dissatisfaction in the circle of private enterprises in the second half of 2018. Through these institutional arrangements and discipline control, the power of the top-level design has been finally realized and discerned in the state bureaucracy. The private sector has also been aware of the increasingly tightened control from the party under President Xi. It has become evident that, as demonstrated by the top-level design, Xi’s efforts targeted not only the persistent problem in policy implementation, but also substantial and efficient control of the whole state and the society for stable governance in China. Top-level Design: Top Principle Is Stability, Main Goal Is Sustainable Economic Growth The top priority of maintaining stability has featured in China’s decision-making model in its decades-long effort to push reform for sustained economic growth since Deng Xiaoping, who began to emphasize stability as the priority for the CPC’s ruling in China after the 1989 Tiananmen event. Since then, the party’s top leaders have become increasingly obsessed with stability and made it the core value and top priority in governing China (Yu 2008, 2012). Stability maintenance, that is, ensuring the party’s perpetual rule in China as the overriding principle, has led top leaders to develop a widespread and deep-rooted attribute in policy making: a tendency to be extremely risk-averse. President Xi, unsurprisingly, embraces this core value to promote his top-level design for governing China. While carrying out the institutional changes in China’s decision-making and policy implementation mechanisms, Xi has been seeking sustained economic growth and fulfillment of the blueprint for comprehensively deepening reform. He must walk a tightrope to keep Chinese society stable while promoting his top-level idea for comprehensive reform in economic and other areas. At the same time, sustained economic growth via market-oriented reform has evolved into the fundamental source of legitimacy for the CPC’s rule in China since 1989, as democratic political reform, freedom of the press, pluralism and other universal values have not been appreciated in Chinese society under the CPC rule. Chinese official media and scholars have called this “the symptom of high growth reliance,” which means high economic growth has evolved into the main solution to ease social conflicts and maintain social stability; the slowdown of economic growth would otherwise precipitate instabilities in the society (Chen and Yao 2012; Jing 2013; Chen 2014; Yang 2016). Since 1989, the core task of governing China for the CPC has become a fine balance between the top leaders’ extreme riskaverse tendency and seeking sustained economic growth via deepening market-oriented reform. 14 CIGI Papers No. 242 — May 2020 • Alex He President Xi faced even more pressure to maintain this delicate balance when China’s economy entered the so-called “new normal” and growth slowed down from 2015 on. Under these circumstances, the two goals of maintaining stability and seeking economic growth are in constant conflict, and the leaders are always under pressure to make choices between maintaining short-term growth to contribute to social stability (but with key reform measures suspended) and pursuing the long-term reform goals (but with decreased economic growth). Achieving this balance is particularly evident on key reform issues such as the SOE reforms, market-oriented exchange rate reform, interest rate liberalization reform and economic restructuring. Reform comes with risks, and key reforms entail potentially huge risks, while, if successful, they could bring significant progress and benefits. Chinese top leaders typically show some indecisiveness and wavering attitudes on these tough reforms. For example, the practice for SOE reform has been carried out for decades, since China began its economic reform at the end of the 1970s, and did not achieve much substantive progress in terms of marketization, even though market-based reform has already evolved into a new orthodox idea and the party leaders always advocate market-oriented reform in almost every economic sector. When it comes to the SOE reform, however, the longestablished concept that the SOEs constitute the most important economic foundation of the CPC’s rule in China prevails and has substantially obstructed the reform. Any market-oriented reforms that would endanger the status of SOEs as dominant, privileged economic entities would be rejected, mostly likely in a subtle way. As a result of this compromise, the SOE reform under President Xi has been stuck between the efforts to promote market-oriented reform and the guarantee of SOEs’ dominant status in some key economic sectors. The latest guiding opinion for the SOE reform was released on September13, 2015, with emphasis on improving state-asset supervision through transitioning from managing enterprise to managing capital, as well as the mixed-ownership reform (Xinhua 2015c). These two priorities in the guiding opinion demonstrated the willingness of the top leaders to usher the market forces into the SOEs. However, the mixedownership reform was regarded as a way to capture wealth from private enterprises to save the heavily indebted SOEs, and caused wide suspicion from prominent private owners. Strengthening the party’s control of the SOEs in the guiding opinion marked a big step backward in the market-oriented SOE reform and was disheartening for proponents of the market-oriented SOE reform. This did send a clear message on the top leaders’ consistency on the direction of the SOE reform: keep the SOEs as the economic and political foundation for the party’s ruling in China. This could partly explain why the process of mixed-ownership reform went slowly after it was formally introduced in 2015. The economic restructuring process in the past decade also demonstrated this balance between the risk-averse tendency and deepening marketoriented reform. The 2008 global financial crisis had a huge impact on China’s investment and export-driven growth model. The drop in external demand and the accumulated structural problems in the economy since the reform and opening-up at the end of the 1970s (Yang 2014) have also pushed Chinese policy makers to proceed with economic restructuring. From 2008 to 2011, the annual CEWC prioritized the promotion of transforming the growth model and economic restructuring and expanding domestic consumption. However, the enormity of the structural problems and the vested interests that developed and were perpetuated in Chinese society during the reform signified that the task of economic restructuring is exceedingly difficult. Furthermore, economic restructuring is supposed to go hand in hand with a short-term growth slowdown. The consequences of “the symptom of high growth reliance” posed serious obstacles to the transformation of economic growth patterns and economic restructuring. Whenever the growth rate was going down, measures such as expanding investment and easing credit would be resumed to hold the economic growth; measures to restrict investment and tighten credit would be introduced while inflation was looming. The stability-obsessed Chinese leaders have struggled to maintain the fine balance between economic restructuring and maintaining stable growth since 2008. President Xi’s efforts to solve the overcapacity issue via industrial restructuring began following the CEWC in 2012. To adjust to the new normal, a period featuring a slower economic growth rate declared by Xi in 2014, policy makers’ attention shifted to seeking economic restructuring and 15Top-level Design for Supremacy: Economic Policy Making in China under President Xi high-quality growth instead of the GDP growth rate. However, once the economy suffers a quick and serious slowdown, it is difficult for President Xi to hold and resist the impulse to resort to short-term stimulus policies and measures. For instance, China’s economic growth suffered a substantial drop beginning in the first three months of 2015, with the GDP growth rate going down to seven percent, reaching a record low since 2009 (Wildau, Mitchell and Anderlini 2015). A series of contingent policies to “stabilize the growth” were adopted to bolster the economic growth following the so-called worst-case-scenarios thinking President Xi advocated. The PBoC lowered the deposit reserve ratio twice, in February and April, and cut the interest rate in March to release liquidity (Su and Gou 2015; Yicai 2015). The Ministry of Finance, Ministry of Housing and Urban-Rural Development (MOHURD) and other departments also took measures to stimulate the economy in the first quarter of 2015 (Li 2015). The dull performance of the economy lasted into the second half of the year, and more ministries joined the chorus on the need to stabilize growth in September to boost investment and export, including the PBoC, the NDRC, the Ministry of Finance, the Ministry of Commerce, MOHURD, the Ministry of Transport, the General Administration for Customs and the Ministry of Industry and Information Technology (Shanghai Securities News 2015). These measures indicated that whenever the economic downturn endangers social stability, policy makers would take whatever steps necessary to stabilize growth. Policies, including economic restructuring, the monetary policy goals of the PBoC or policy goals from other departments, usually need to be set aside or modified for the time being to guarantee the de facto top priority of maintaining stability. For example, the PBoC’s target of formation of a market-oriented exchange rate mechanism had yielded to the more important goal of stabilizing growth. The August 11 exchange rate reform in 2015 toward a free floating exchange rate mechanism was suspended three days after it was launched out of worries over depreciation and further overshooting of the value of the renminbi (RMB) that would cause widespread market jitters and jeopardize the stability of the financial market and thus the whole economy.10 It is fair to say that there is a general tendency among Chinese top leaders since Deng Xiaoping to prioritize stable economic growth and social stability and try to strike a balance between economic and social stability and seeking reform and growth. The trend has not started with President Xi, but he has made even more of an effort at both ends of the balance, equipped with strengthened party control over each sector of China’s political economy. Whether on SOE reform, economic restructuring or exchange rate reform, the top leader pushed harder, promoting reforms and restructuring with greater government intervention while keeping the focus even more closely on maintaining social stability. With a more intense sense of urgency at both ends of the balance, Xi pushed harder in both economic reform and growth and maintaining social stability. Certainly, after noticing the great potential risks, Xi would push policies to go back to guaranteeing the top priority of maintaining stability. Summary The top-level design laid the theoretical foundation for Xi’s overall control of the reform agenda and economic policy-making process. He claims that China’s reform is a holistic system consisting of economic, political, cultural, social and ecological subsystems. The model of renewed central leading groups’ control established the institutional framework for Xi’s top-level design to promote the reform and dominate the policy-making process. The top-level idea emphasizes building the party’s full control of economic work and everything else, which is expected to be guaranteed through tightened party control over the state bureaucracy, private sector and civil society. The top-level idea follows even greater efforts to keep the balance between the extreme risk-averse tendency and seeking economic growth. This represents Xi’s greater caution in handling the economy. After all, delivering sustainable economic growth constitutes the most important foundation of the party’s legitimacy in governing China. 10 Some scholars, such as Yu Yongding, insisted, in retrospect, that the August11reformcouldbethecriticalpointtofinishChina’sjourneyof movingtoafree-floatingexchangeratesystemifthePBoCcouldholdthe line and did not jump hastily into the market to intervene (Yu 2017). 16 CIGI Papers No. 242 — May 2020 • Alex He TheProblemswithXi’s Top-level Design in Economic Policy Making With the central leading groups’ institutional control, unprecedented emphasis on the party’s leadership in economic work and everything else, and special efforts on keeping a fine balance between growth and stability, Xi’s top-level idea achieved tightened control over China’s policy-making process. However, the longstanding problems in China’s policy-making process, in particular, how to effectively enforce decisions, have haunted President Xi and his top policy experts. These problems include old bureaucratic problems in China’s policy-making and implementation process, categorized by Xi as the “first kilometre, middle obstruction, and last kilometre” barriers (Xinhua 2015a). There are different bureaucratic problems as well that emerged or were exacerbated in the policy process under President Xi’s top-level design. First, there are serious problems that exist in China’s decision-making mechanism that constitute major obstacles for Xi Jinping. Xi used the metaphor of the "first kilometre,” referring to the first stage of policy implementation that usually causes problems in his remarks at the tenth meeting of the CLGCDR in 2015 (Xinhua 2015a). Specifically, the first kilometre means the initiative of reform design, in which many of the decisions are vague, confused, or even in conflict with each other and unfeasible. Obstruction for the reform thus formed at the beginning. China’s decision making at the highest level typically only gives instruction and indicates the direction for the important issues in vague language, instead of giving explicit polices, which renders the bureaucrats more room to interpret the top leaders’ design and get involved in the decision-making process at an earlier stage than in other countries (Chen and Naughton 2016). In the context of China’s decision-making system, this is called the second-time decision making, which refers to confirmation and elaboration, as well as optimization and evaluation of the feasibility of the decisions made by top leaders. It is a stage that combines both policy making and implementation, and it happens at the ministerial and local levels. This indicates the great importance of the bureaucracy at the ministerial level for policy formation and at the local level for policy execution. The second-time decision-making is an ordeal as it always involves turf wars among multiple ministries and usually ends up with no substantive policy being made. As a result of this, many vaguely worded decisions by the top leaders are stalled in the stage of the first kilometre, reflecting the fact that the real consensus on reform and important policy issues is still missing. This is typical when it comes to tough decision making, such as SOE reforms. Although the party central and the State Council already made decisions in 2015 to promote the SOE mixed-ownership reform, the process has not been substantively advanced. This is due, in part, to the lack of real consensus on the reform, and the reform proposals on key issues in the SOEs have been compromised. The key government agencies such as the NDRC and the State-owned Assets Supervision and Administration Commission of the State Council still hold crucial power over management and personnel in the SOEs. Xi’s comprehensive reform plans have not been carried out at a level deep enough to touch the long-existing difficulties in China’s policy implementation process. Second, interest groups “kidnap” or hinder decisions to be implemented in a variety of ways. This is what Xi called the “middle obstruction” and happens mostly in the process of reform promotion. These groups could be ministries or local governments. Ministries, as the leading agencies that make specific second-time decisions and execute the reforms, are usually the targets of the reform, or at least beneficiaries of the existing policy. This drawback, which is a result of China’s government structure and decisionmaking mechanism, can, to a large extent, prevent any essential reform measures from being made. To make it worse, these key ministries simultaneously enjoy the powers of decision making, implementation and supervision. Under these circumstances, reform can easily turn out to be an excuse and opportunity for these ministries to expand their jurisdiction and interests, or selectively enforce the policies that benefit them. Ministries and local governments as institutional agencies have their own vested interests and worry that their interests would be hurt in the reform; therefore, they tend to decline or at least show reluctance to promote real reform measures, and 17Top-level Design for Supremacy: Economic Policy Making in China under President Xi would obstruct policy implementation by using all the bureaucratic means to hold off policy execution, selectively implement, water down or change policies to protect their own interests. Under pressure from the top to push reform, a variety of superficial reform measures, such as issuing policy documents, convening conferences and introducing proposals, were taken but no specific policies were implemented. Reform, therefore, exists only on paper without any real concrete actions being delivered. “Issuance of documents is reform itself” best illustrates the feature of formalism in the reform: officials pretend they are promoting reform by issuing policy statements but take no actions. Even if specific ministries or agencies show resolve to advance reform, they would find that difficulties in coordination between different departments and between different tiao and kuai11 would kill their willingness for reform. Third, there are the “last kilometre” problems that exist in the final enforcement stage of specific policies at the grassroots level. Who “pays the piper” for the reform is a major issue that essentially always obstructs the final implementation of specific policies. Basically, the reform measures could only be finally materialized if the concern of who pays the bill for the reform was addressed. The issue of who pays the piper for the reform relates to a key issue that local governments pay the most attention to, i.e., defining the respective powers and a better expenditure structure (spending responsibilities) of the central and local governments. In addition, many grassroots-level officials face the dilemma that the reform would hurt their own interests, and promotion of the reform would not benefit them. As a result, they usually chose to deal perfunctorily with the reform requirement from their superiors. Xi’s top-level design, featuring more consolidated power and control at party central over policy making and execution, as well as an unprecedented obsession with stability, has worsened some of the existing bureaucratic problems in China’s daily economic management and brought devastating repercussions in its crisis response. 11 InthecontextofChina’spolitics,tiao refers to the vertical leadership system over various sectors (for example, agriculture, transportation) reaching down from the ministries of the central government to departments,bureausandofficesatthelowerprovincial,municipaland township levels; kuai refers to the horizontal level of authority within a provincialorlower-levelterritorialgovernment.Conflictsbetweentiao and kuaiisawell-knownbureaucraticprobleminChina’sofficialdom. First, Xi’s determined anti-corruption campaign and strengthening of party discipline, combined with China’s ongoing economic transformation, created negative consequences in policy implementation that he probably did not fully expect. A large number of officials showed indolence in performing their duties. Avoiding the suspicion of corruption or violation of party discipline is the primary reason for the large scale of officials’ unwillingness and failure to perform their duties. Bureaucrats at all levels of the Chinese government play the role of policy enforcement and push for local economic development. As a result of a great deal of dereliction of duty in the bureaucracy, China’s government intervention-driven economic growth model is losing a significant part of its momentum. Under the overwhelming pressure brought by Xi’s ruthless fight against corruption, the previously normal activities practised by officials, such as connecting with businesspeople and investors to promote economic growth, now could be regarded as a type of corruption. The likelihood of officials being investigated on graft charges is much higher simply because of the decisions they made to promote reform. The more you work, the more mistakes you could make. It is not worth taking risks to make decisions, and the best strategy for officials is to do nothing. Plus, with their superiors and colleagues under ongoing corruption investigation, many local cadres feel insecure and have no desire to perform their duties. Another reason for the phenomenon of sloppiness in performing duties lies in the changes in how officials work to promote economic growth. The party central has been advocating economic restructuring and encouraged measures such as more restrictions on the untamed growth of the real estate market and improving the real living standard instead of increasing GDP. The old model of economic growth, which typically includes doing whatever it takes to attract investment, such as tax breaks and preferential land policy, is being transformed and discarded, leaving many officials bewildered when it comes to performing their duties. The simple, direct old ways of selling land, preferential investment promotion and loans from state-owned banks to expand investment are ending. Structural reform to get away from debt-addicted growth and move toward an environmentally friendly model of economic development is much more 18 CIGI Papers No. 242 — May 2020 • Alex He challenging and requires officials to meet a higher calibre to achieve the policy goals. Researchers at the NDRC analyzed a wide variety of practices used by China’s bureaucrats at the local level and examined how these bureaucratic nightmares prevent policies from being effectively enforced (Zhang, Sun et al. 2017). Typically, officials would water down or expand the original policy from central or other higher-level authorities or replace it with their own local policy in the name of enforcing the policy, depending on which way would benefit them most. They would also simply selectively execute the policy that would benefit them. For a policy that could harm their own interests, they would promise to promote it but actually resist implementation, carry it out superficially and frivolously, or push it rigidly without any flexibilities. They would also explain and enforce a policy completely out of their own deliberate or accidental misunderstanding of it, or pretend to be implementing policy but actually be holding a wait-and-see attitude, and so on. The widespread idleness among officials has drawn attention from the top. President Xi pushed officials to be more diligent in policy implementation and they faced new pressure to avoid suspicion of indolence in performing duties. Officials typically demonstrated two types of actions at this point: they were either still reluctant to take initiatives to implement policies but have to show they are busy performing their duties to avoid being suspected of inaction, or they were becoming inflexible and over-eager in enforcing policies. As a result, policy implementation is either halted by officials in many innovative and delicate ways to give the impression they are working hard, or executed in a rigid but ardent way. One recent example of the latter was the barbarous mass demolition of neighbourhoods in Beijing where many migrant workers lived in winter 2017 under the leadership of the newly appointed mayor, Cai Qi (Mai 2017). Second, the stability-obsessed ruling style and unprecedented pressure on state and local bureaucrats to maintain economic and social stability intensified the existing notorious bureaucratic problems, including tight control of the flow of information, only reporting and releasing good news12 and evading taking responsibilities by waiting for orders from superiors before taking any essential actions. These problems could have catastrophic consequences in times of crisis, such as an epidemic outbreak. All of these ramifications, if they happened in the daily management of economic and other areas, are gradual and the damage would not be immediate. But when prompt reactions are needed when facing a crisis, these worsened bureaucratic problems under Xi’s top-level tightened control can have disastrous results, as shown in China’s initial handling of the COVID-19 pandemic when it first broke out in Wuhan, Hubei Province, China, in December 2019. Here are some observations on China’s local and central government’s initial response to the coronavirus outbreak in Wuhan based on public information available.13 First, China’s response and initial handling of the coronavirus up to January 7, 2020, seemed hesitant as it was a novel virus at that point and the disease it caused was still called “pneumonia with unknown cause.” An early assessment of the novel virus by the national health authorities concluded that the virus is a brand-new coronavirus homologous to severe acute respiratory syndrome (SARS) and supposed to be transmitted through the respiratory tract (Caixin 2020a14). With the wisdom of hindsight, it is obvious that the top leaders did not give enough attention to the coronavirus crisis in its early stage. It is safe to say that outbreak prevention was not the priority agenda item at the PBSC meeting on January 7 and Xi gave only general and vague instructions on responding to the virus, according to public information available (Xi 2020; Xinhua 2020b). However, the top leaders’ early response seems conceivable, especially when compared to 12 A late Chinese writer, Wang Xiaobo, had hinted at this bureaucratic vice inChinabytellingafictiousstoryaboutmessengersoftheKhwarezmian dynasty in the approximate period of the eleventh to thirteenth century, where the emperor rewards the messenger who brought good news and kills the one who came with bad news. 13 Please refer to Caixin (2020a), Caixin (2020b), Caijing (2020), Bingdian Weekly (2020), Gupta (2020), The Wall Street Journal (2020) andXinhua(2020a)forChina’slocalandcentralgovernment’sinitial response to the coronavirus outbreak in Wuhan. 14 The original article has been removed. A copy of the original article can be seen at: www.jenniferzengblog.com/home/2020/2/26/tracking-thesource-of-novel-coronavirus-gene-sequencing-when-thealarm-goes-off. 25Top-level Design for Supremacy: Economic Policy Making in China under President Xi of the policy-making process achieved only very limited progress. However, Jiang and Hu’s ways of governing China never went back to a Mao style of one-man control. Under Xi’s leadership, the political reform and democratization of the policy-making process quickly reversed to the level in Mao’s era. Xi built up the roles played by the central leading groups and established new ones, and he headed most of them as a measure to cement control of policy making in almost every sector at the central level. He strengthened the party’s control over the government at every level and in every sector. Contrary to the separation between the party and the government, he proposed merging party and government in the same area or sharing offices between those party and government agencies that have similar duties. He also shored up the party’s tight control over the press, congress, the military, rank and file government officials and the SOEs by reiterating the party’s leadership over everything and relying on the party chief in every government department, party organizations and government-affiliated social groups, and SOEs. This modern version of one-man control over the political process under President Xi in the digital age has had, and will continue to have, far-reaching impacts on China’s economic policy-making process. First, Xi, with his unprecedented power and authority and the new approach of top-level design, is determined to start the long overdue structural reform in China’s economy, which is a positive thing. As history has shown, tough reform needs a tough leader to advance it. The great difficulties and predictable economic slowdown and subsequent negative political repercussions facing the economic restructuring kept the top leaders from pushing the real economic structural reform during the Hu-Wen era, prior to Xi coming to power. China’s economic transformation toward being driven more by consumption, innovation and technology and less driven by export and investment was talked about and prioritized for years during the Hu-Wen era, but no substantial policies and actions have been taken since then. Xi’s determination to push forward the real economic structural reform is probably derived, in part, from his understanding that China’s economic slowdown was unstoppable, as well as his realization of the exigency for immediate and essential structural reform, judging by his major policy statement on the definition of the new-normal stage in China’s economy. To promote economic restructuring, it is necessary to grasp the power in economic policy making and the effective means and ways for policy implementation as the Chinese premier normally holds the authority in economic policy making and China’s bureaucratic system has a reputation of weak capacity for policy execution. What Xi did to seize the authority in economic policy making reflected the logic and philosophy of top-level design, which says that, as a holistic reform, the top policy makers’ grip on comprehensive power over every sector of the Chinese political economy is absolutely necessary. Certainly, Xi’s determination and measures he took for the economic structural reform could also be explained as a means to concentrate power in his hands, in particular, he must grasp the most crucial power in economic reform and growth. In any case, it is safe to say that Xi has concentrated unprecedented power in economic policy making and took substantial measures to promote the long-standing, thorny structural reform. Second, policy making has followed a top-down approach under the theoretical framework of toplevel design, and the trial-and-error method that is based on the bottom-up, incremental approach and appreciates the wisdom and practice gained from the grassroots level in the policy-making process has been less and less applied. The top-level design, a more top-down policy-making approach, increased the chances of introducing unwise or impractical policy making. Xi’s major economic policies, such as supply-side structural reform, preventing systemic financial risks and the BRI, were based on the judgment on the situation and wisdom by his close allies of senior leaders and his small circle of close senior advisers. Certainly, Xi’s policy making was usually based on many rounds of field investigations and broad consultations and recommendations from both within and outside of the government and party systems, as shown in the decision-making model developed in China over the past decades. It is hard to say, however, if the decision can truly be based on an understanding of the real situation. The fact that, in practice, measures to promote supply-side structural reform and prevent systemic risks caused many new problems in the economy demonstrated that the theoretical design of economic policy needed to be constantly complemented by the ongoing grassroots-level practice in managing the economy. 26 CIGI Papers No. 242 — May 2020 • Alex He Third, using institutional power and unprecedented emphasis on the party’s discipline and party loyalty, Xi put great efforts into the control of both policy making and policy implementation and achieved a mixed result. He headed as many as nine leading groups, indicating his ambition to advance direct control of policy making through his leadership in existing leading groups and newly established ones. Xi used central leading groups as his tool for policymaking control and appointed the officials and personnel he trusts in key government positions. By doing so, he can have confidence in making his vision and plans. Xi’s deep worry is how to implement his grand plan to rejuvenate the nation, given policy enforcement has been the lingering, obstinate problem facing China’s government system. Comprehensively strengthening the party’s self-discipline, or emphasizing the “purity” of the party, is his last resort to guarantee policy implementation. Relying on the “crucial minority,” the key officials in key government and party positions, indicated his thinking and solutions to strictly push and supervise the policy implementation at all levels, from the highest and middle levels to the grassroots level. It turned out that Xi’s control of policy implementation concerning reform measures made some progress through the CLGCDR system at all levels, which formed a new vertical system that supervises and inspects policy enforcement from time to time at all local levels, including provincial and county levels. When it comes to the complicated economic and financial issues, however, the rigid and one-size-fits-all approach caused many problems. Deleveraging under the major policy of preventing systemic financial risks compounded the difficult problems of financing facing private enterprises, in particular the midsized to small companies, and contributed to the slowdown of the economy since 2017. Structural reform in many sectors, such as steel and coal, played a part in the mounting pressure of economic downturn. Cutting inventory policy that was targeted to bring down the home prices in small cities unexpectedly triggered soaring prices in the housing market in major cities in 2016. Cutting overcapacity in the steel and coal sectors as one of the major policies concerning supply-side structural reform relied mainly on administrative power to enforce, and achieved noticeable success at the expense of the private companies in these sectors. Fourth, under President Xi’s ruling, the party’s deeper involvement in economic policy making and economic management intensified China’s model of government intervention in the economy and further complicated the relations between the state-owned sector and the private sector. Mixed ownership reform in SOEs, with the goals of both making state-owned assets stronger, better and bigger, and encouraging private companies to participate in the SOEs as shareholders, further sent unclear messages about the party’s viewpoint on the private sector in China. Private enterprises in the steel and coal sectors undertook the cost of the supply-side structural reform and shouldered most of the capacity reduction in the two sectors. Large SOEs have squeezed out private businesses in many sectors since Xi came to power in late 2012, resuming the trend of “state march on, private retreats” of the early 2000s. This trend intensified and aroused wide media attention in 2018; Xi himself along with other top leaders had to clarify their support for the private sector. It is safe to say that the ending of the private sector in the Chinese economy represents the extreme left-wing voice and is not likely to happen any time soon in today’s China. However, despite the assurance by the top leaders and the constant introduction of policies from the government, in particular from the central bank, to support the development of the private sector, the party-state’s gradual encroachment on private sector businesses is still quite noticeable. Finally, Xi’s style of highly concentrated power and absolute control over policy making has intensified existing old bureaucratic problems and brought a variety of new problems to China’s political economy. His heavy-handed approach to ruling in the party-state under the idea of toplevel design has created a highly intense mutually suspicious atmosphere among officials, which, ironically, led to many new forms of maladies of bureaucracy in China’s politics, contrary to Xi’s expectation. The atmosphere of mutual suspicion among officials created bureaucratic methods such as “slow-walking” orders or keeping information from superiors, in order to avoid performing their duties. The party’s more direct involvement in the economy, in particular in the management of private companies, created a tense and suspicious sentiment among business 27Top-level Design for Supremacy: Economic Policy Making in China under President Xi circles and beyond about China’s future in further market-oriented reform and opening up. China’s initial reaction to the COVID-19 pandemic demonstrated that when facing a crisis, such as a public health crisis, the stability-obsessed ruling style and unprecedented pressure on state and local bureaucrats under President Xi’s top-level design is unable to react in a timely and swift manner, with potentially catastrophic consequences. The existing notorious bureaucratic problems, including a tightly controlled flow of information, and local officials’ inclination of not reporting and releasing bad news and dodging responsibilities by only taking actions following a superior’s orders, have been amplified under President Xi’s top-level governance style and eventually played a large part in the coronavirus outbreak in January 2020. Looking to the future, Xi’s style of an upgraded version of one-man control over major policy making on economic affairs and in other fields could be weakened if the ongoing economic downturn China is facing lasts and develops into a serious economic crisis. 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